Parent Corporation owns 100% of the stock of Subsidiary Corporation. The adjuste

Question

Parent Corporation owns 100% of the stock of Subsidiary Corporation. The adjusted basis of its stock investment is $100,000. A plan of liquidation is adopted. Subsidiary distributes to Parent assets with a $325,000 FMV and a $275,000 adjusted basis. Subsidiary also distributes liabilities in the amount of $40,000. Subsidiary has a $150,000 E&P.

a) What is the amount and character of Subsidiary Corporation's recognized gain or loss on the distribution?
b) What is the amount and character of Parent Corporation's recognized gain or loss on the redemption of the Subsidiary stock?
c) What basis does Parent take in the assets?
d) What happens to parent Corporation's basis in the Subsidiary stock and to Subsidiary's tax attributes?

Explanation / Answer

SOLUTION:

a) What is the amount and character of Subsidiary Corporation's recognized gain or loss on the distribution?

Solution: There is realized gain of $50,000 (=$325,000 - $275,000), however no recognized gain (Sec. 337).

b) What is the amount and character of Parent Corporation's recognized gain or loss on the redemption of the Subsidiary stock?

Solution: There is realized gain of $185,000 (=$325,000 - $40,000 - 100,000), however no recognized gain (Sec. 332).

c) What basis does Parent take in the assets?

Solution: A carryover basis of $275,000

d) What happens to parent Corporation's basis in the Subsidiary stock and to Subsidiary's tax attributes?

Solution: The Parent stock basis disappears and is replaced by the basis of each of the individual assets. Also the E&P balance of subsidiary carries over to Parent

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